Tuesday, June 10, 2014

An incredible set of graphs below showing 10 year bond yields for France, Spain and Italy which have simultaneously fallen to the lowest yields in history. As a brief reminder; all three of these countries are on the verge of a massive government debt disaster. These bonds are being purchased by (insolvent) banks within their own borders using massive leverage. They are being purchased by investors who believe that the ECB will soon monetize (print money to purchase) all government bonds. If you want to take it one step beyond the ridiculous, please remember that a central bank printing money to purchase a government bond provides no fundamental strength to that bond because they are diluting the future return investors are paying for today.

The world has become so twisted and distorted beyond reality due to the central bank interference around the world it makes it impossible to even try to quantify how enormous the catastrophe will be when these risk assets begin to unwind. Perhaps it will be large enough during the next collapse that someone will take notice and at least try to stop it from occurring again, but based on how quickly we have returned to the insanity of 2007 in financial markets around the world there is little hope that any lessons will be learned during the next disaster.

I discussed the bearish sentiment toward precious metals over the weekend, noting that the daily sentiment index toward silver reached 9% bulls last week. That means 91% of traders believed the price would fall from this level ($19). The following charts from The Short Side Of Long help provide an extended visual of the incredible hatred toward the metal.

The first chart shows that hedge funds are net short silver for the first time since 2006. It is the largest short position since, well, ever.

The next chart shows that the silver short position (red line) currently held by speculators is also at a record high, by a wide margin.

Does all this bearishness mean the market must turn higher tomorrow? Of course not. Even if everyone is completely on one side of a boat, they can hang out there for a long time before someone decides to move back to the other side. The market moves when it wants to move.

That being said, for long term patient investors, it is almost impossible for silver to paint a more attractive entry point than it is today. See:

Sunday, June 8, 2014

The chart below from The Telegraph is a great visual showing the most to least expensive stock markets around the world. Last week we reviewed global stock markets using exclusively the CAPE price to earnings ratio in How The Home Bias Phenomenon Impacts Investors.

The value indicator below uses the CAPE price to earnings ratio along with two other metrics; standard price to earnings ratios and price to book ratios (the price of a company in relation to its underlying assets).

The study found that the four most expensive markets in the world are Indonesia, Pakistan, Sri Lanka and the United States (the most overpriced market in the world).

The four least expensive markets are Greece, China, Hong Kong and India. While both countries face different short term challenges, I believe any short term pull backs in the Chinese and Indian stock markets represent tremendous long term buying opportunities. Click for larger image below. Full article here.

The announcement this week from the ECB (see Explaining What The ECB Did Yesterday) was centered around the news that they are bringing their deposit rates into negative territory. These negative rates apply to the bank deposits held at the ECB, not citizen's deposits held at the banks. However, citizens will end up paying this cost through higher fees charged for the "privilege" of keeping their savings in a bank account.Their savings will be charged a negative interest rate indirectly.

With 0.0% returns (or below) for holding your assets in safety (cash) in the United States, U.K., Japan and now Europe, citizens have been forced out into risk assets in order to obtain some form of yield through dividends (stocks) or interest (bonds). This has pushed the price of risk assets in the United States back into the over-valued/extreme positive sentiment territory last seen during 2007. See:

While the U.S. asset prices are perhaps the most extreme in terms of overvaluation (other than the ridiculous yields currently seen on Japanese government bonds), asset prices in Europe, the U.K. and Japan have seen an experienced a price levitation over the past 3 years.

The option for investors today is to either hold cash with no return or invest in risk assets and reach for yield. This is currently a no-brainer because investors have the psychological backdrop of three steady years of risk asset price appreciation. Holding money in cash seems ridiculous when you can receive a steady yield (2% to 4%) and a 30% plus increase in the asset price itself (seen in U.S. stocks in 2013).

However, what if the thought entered back into investors minds that there was even a possibility that risk assets would not move higher in a straight line upward forever and potentially had the chance to.......fall?

When assets fall in price the "no return" cash category begins to look extremely attractive. Found within this most hated cash group is precious metals, which are a cash alternative. It is possible investors will look to diversify into this group, even at a very small percentage, if they find out that they are being charged to hold their money in the bank.

Precious metals have been falling in price for 3 years and sentiment is back at record lows. Last week the daily sentiment index reached 9% bullish on silver, meaning that 91% of traders believed the metal would fall lower from these prices. The index is now a mirror image of the sentiment readings when silver was surging upward in the $40 plus range in 2011 (silver is at $19 today).

An ounce of silver is currently at a price below the total cost to mine it out of the ground. New and planned production for mining of the metal has either been shut down or postponed. I believe that during the next paper asset price decline central banks will respond just as they have during the past six years; additional monetary easing and larger asset purchase programs. There will be a rush back to precious metals at a time when very little supply is entering the market (it takes years to bring a mine to production).

Some see the recent price decline as the end of the secular bull market in precious metals. I see it as the perfect set up for the grand finale of the secular bull. Positive sentiment has been completely washed away and investors have liquidated out of their position. Supply has been cut back or shut off.

While the final bull market run in gold should be exciting, it will be the silver price rise that brings shock and awe to the masses.

The jobs report headline on Friday was that the United States has now recovered all the jobs lost during the "Great Recession." You've probably seen the chart below many times over the past few years, which shows the percentage of jobs lost compared to previous recessions in the United States going back to 1948. It was known around the online financial world as "the scariest chart."

The Oregon Office of Economic Analysis released an excellent chart this week which takes the current employment recession line above and layers it against the 5 largest financial crises in history plus the Great Depression (U.S. '29). When shown in the this context the most recent employment decline in the U.S. looks mild.

That's where the happy part of the story ends because as we have discussed numerous times during the last five years, the recovery in U.S. unemployment has been due in large part to Americans leaving the labor force. The chart below from Zero Hedge shows that the total number of Americans leaving the labor force has tracked higher in parallel fashion with the "economic recovery."

The group "not in the labor force" is composed of those that have retired or have given up looking for a job. If you use the same methodology to calculate unemployment that was used during 1929, the current unemployment rate is at 23% (close to the absolute peak of unemployment during the Great Depression at 25%).

The difference this time around is the trillions of dollars in government debt used to support Americans through welfare programs.

"We should be careful to get out of an experience only the wisdom that is in it and stop there lest we be like the cat that sits down on a hot stove lid. She will never sit down on a hot stove lid again and but she will never sit down on a cold one either."

- Mark Twain

"It's waiting that helps you as an investor, and a lot of people just can't stand to wait."

- Charlie Munger

"Live as if you were to die tomorrow. Learn as if you were to live forever."

- Gandhi

"One of the best rules anybody can learn about investing is to do nothing, absolutely nothing, unless there is something to do. I just wait until there is money lying in the corner, and all I have to do is go over there and pick it up. I wait for a situation that is like the proverbial shooting fish in a barrel."

- Jim Rogers

"Capitalism without financial failure is not capitalism at all, but a kind of socialism for the rich."

- James Grant

"At this juncture, the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained."

- Ben Bernanke, March 2007

"Everything that needs to be said has already been said. But since no one was listening, everything must be said again."

- Andre Gide

"When people are getting richer and richer but they're not actually producing anything, it can't end well."

- Louis CK

"In economics things take longer to happen than you think they will, and then they happen faster than you thought they could."

- Rudiger Dornbusch

"I don't write about what I know. I write to find out what I know."

- Patricia Hampl

"Chains of habit are too light to be felt until they are too heavy to be broken."

- Warren Buffett

"Everyone has a plan until they get punched in the mouth."

- Mike Tyson

"Interest on the debt grows without rain."

- Yiddish Proverb

"You can have comfort, or you can have value. You cannot have both."

- Jim Grant

"Investors should remember that excitement and expenses are their enemies. And if they insist on trying to time their participation in equities, they should try to be fearful when others are greedy and greedy only when others are fearful."

- Warren Buffett

"No very deep knowledge of economics is usually needed for grasping the immediate effects of a measure; but the task of economics is to foretell the remoter effects, and so to allow us to avoid such acts as attempt to remedy a present ill by sowing the seeds of a much greater ill for the future."

- Ludwig von Mises

"Men who can both be right and sit tight are uncommon."

- Jesse Livermore

There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.

-Ludwig von Mises

"Most investors think quality, as opposed to price, is the determinant of whether something's risky. But high quality assets can be risky, and low quality assets can be safe. It's just a matter of the price paid for them."

- Howard Marks

"Whenever you find yourself on the side of the majority, it is time to pause and reflect."

-Mark Twain

"None are more hopelessly enslaved than those that falsely believe they are free."

-Goethe

"The longer the markets disobey basic rules of valuation, the bigger the opportunity for good investors to reap the benefits. Value investing works precisely because markets become dysfunctional at times."

-John Coumarianos

Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria. The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.

-Sir John Templeton

"No very deep knowledge of economics is usually needed for grasping the immediate effects of a measure; but the task of economics is to foretell the remoter effects, and so to allow us to avoid such acts as attempt to remedy a present ill by sowing the seeds of a much greater ill for the future."

- Ludwig von Mises

"People only accept change in necessity and see necessity only in crisis."

-Jean Monnet

Requiring a central bank to print money to increase government's purchasing power invariably ignites a hyperinflationary firestorm. The result through history has been toppled governments and severe threats to societal stability.

- Alan Greenspan

"It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning."

- Henry Ford

"Do you want to sell sugared water for the rest of your life? Or do you want to come with me and change the world?"

-Steve Jobs

"I'd be a bum on the street with a tin cup if the markets were always efficient."

-Warren Buffett

"The market can stay irrational longer than the investor can stay solvent."

- Keynes

"While the government struggles to save one crumbling enterprise at the expense of the crumbling of another, it accelerates the process of juggling debts, switching losses, piling loans on loans, mortgaging the future and the future's future. As things grow worse, the government protects itself not by contracting this process, but by expanding it."

-Ayn Rand, 1974

"The test of a first-rate intelligence is the ability to hold two opposing ideas in mind at the same time and still retain the ability to function."

- F. Scott Fitzgerald

"All our life, so far as it has definite form, is but a mass of habits - practical, emotional, and intellectual - systemically organized for our weal or woe, and bearing us irresistibly toward our destiny, whatever the latter may be."

-William James

"Men it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one."

-Charles Mackay

The greatest enemy of knowledge is not ignorance, it is the illusion of knowledge.

- Stephen Hawkings

"Give me control of a nations money supply, and I care not who makes it's laws."

- Amschel Rothchild

Illusions commend themselves to us because they save us pain and allow us to enjoy pleasure instead. We must therefore accept it without complaint when they sometimes collide with a bit of reality against which they are dashed to pieces.

- Sigmund Freud

Many of life's failures are people who did not realize how close they were to success when they gave up.